Old National Bancorp

ONB Details

Old National Bancorp (NASDAQ: ONB) is a holding company of Old National Bank, which operates through 162 Banking centers in the United States. ONB provides various loans, deposit products, and other financial services such as private banking, brokerage, trust, investment advisory to individual and commercial customers. Most of the loans given by the bank are in commercial and real estate (both commercial and residential) categories. As of June 16, 2021, the company’s market capitalization stood at USD 3.08 billion.

Merger to Become a Leading Midwestern Bank: On June 01, 2021, the company announced a merger with First Midwest Bancorp, Inc. in an all-stock deal having a total market value of USD 6.5 billion. The combined entity will operate in the name of ONB and will become the sixth-largest bank in the Midwest, having total assets and deposits of USD 45 billion and USD 34 billion, respectively. The transaction is expected to close by the end of FY21 or at the beginning of FY22. The merger is expected to be accretive to the shareholders of both banks.      

1QFY21 Results: The company reported a decline of 5.21% in total interest income to USD 159.23 million in Q1FY21 (ending March 31, 2021) compared to USD 168 million in Q1FY20 (ending March 31, 2020). Interest income from loans constituted 79.05% of the total interest income in Q1FY21, with the rest coming from interest income from investment securities. ONB reported a 283.47% YoY increase in net income to USD 86.82 million during the quarter. Net Interest Margin (NIM) diminished by 37bps YoY to 2.94%. In Q1FY21, the company’s total deposits increased by 24.78% to USD 17,850 million from USD 14,305 million in Q1FY20. Non-Performing Assets (NPAs) decreased by 7.21% to USD 552.66 million compared to USD 549.43 million in Q4FY20.   

Key Risks: As of March 31, 2021, commercial real estate lending accounted for 42.76% of the total loan portfolio. These loans possess a higher risk than residential real estate because the collateral securing these loans may not be as easily sold as residential real estate. If these loans get impaired due to any reason, it may have a severe impact on the company's financials. 

Outlook: In its Q1FY21 press release, the company stated it had commercial loans to the extent of USD 623 million in the accepted category for Q2FY21, indicating a healthy growth pipeline. It expects to maintain a strong liquidity position with a low loan to deposit ratio of 78%.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

 (Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

ONB Daily Technical Chart

Stock Recommendation: ONB has decreased by 7.0% in the past 3 months and is currently trading in the higher band of the 52-week range of USD 12.02 to USD 21.28. The stock is currently trading above its 200 DMA level. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 17.32. Considering the correction in the stock price in the past 3 months, prudent merger, we recommend a “Watch” rating on the stock at the closing price of USD 18.85, up by 1.18% as of June 16, 2021.

* All forecasted figures and Industry Information have been taken from REFINITIV.

* The reference data in this report has been partly sourced from REFINITIV. 

ConnectOne Bancorp, Inc.

CNOB Details

ConnectOne Bancorp, Inc. (NASDAQ: CNOB) is the holding company of ConnectOne Bank, a New Jersey-based chartered commercial bank. In addition, the bank operates with 25 other banking centers. The company provides loan and deposit products and other financial services to individuals and businesses. CNOB offers various loans such as commercial loans, commercial real estate loans, commercial construction loans, residential real estate loans, and consumer loans. As of June 16, 2021, the company’s market capitalization stood at USD 1.09 billion.

Q1FY21 Results: The company reported a 5.33% decline in total interest income to USD 72.62 million in Q1FY21 (ending March 31, 2021) compared to USD 76.71 million in Q1FY20 (ending March 31, 2020). Interest and fees on loans contributed 97.02% of the total interest income in Q1FY21, while the rest comes from interest and dividends on taxable securities. The company reported a 5.47x YoY surge in net income to USD 32.99 million compared to USD 6.03 million in Q1FY20. Total deposits declined slightly to USD 5.951 billion compared to USD 5.959 billion as of Q4FY20. Net Interest Margin (NIM) widened by 15 bps YoY to 3.56% for Q1FY21, primarily due to a reduction in the cost of funding interest-earning assets. Non-Performing Assets (NPAs) edged lower by 1.22% to USD 60.94 million as of Q1FY21 compared to USD 61.69 million as of Q4FY20.

Robust Profitability and Capital Generation (Source: Investor Presentation, June 2021)

Key Risk: The company’s loan portfolio is largely comprised of commercial real estate loans. These types of loans usually expose a lender to a higher degree of the credit risk of non-payment than residential mortgage loans. As of December 31, 2020, the company had USD 4.40 billion of commercial real estate loans, representing 70.60% of the total loans receivables. As a result, if these loans get impaired due to any reason, it may severely impact the company’s financial health.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

CNOB Daily Technical Chart

Stock Recommendation: CNOB’s share price has surged by 87.01% in the past nine months and is currently trading at a higher band of the 52-week range of USD 13.12 to USD 28.72. The stock is currently trading far above its 200 DMA levels. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 26.21. Considering the significant increase in the stock price, robust track record of loan and deposits growth, associated risks, and current valuation, we recommend a "Watch” rating on the stock at the closing price of USD 27.94, up by 1.67% as of June 16, 2021.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.